Disclosure of Financial Reporting of Islamic Financial Institutes of
Bangladesh: A Concept of Relevant Reviews
1Md. Robiul Islam,2Mohammad Shamsus Sadekin
1Assistant Professor, Ph.D. Fellow, Institute of Islamic Banking and Finance, International Islamic University, Malaysia
2Associate Professor (Accounting), Department of Humanities, Chittagong University of Engineering & Technology (CUET)
E-mail: robiulbiu@gmail.com1, sadekinmba@yahoo.com2
Abstract
Islamic banking is a system of banking that avoids receipt and payment of interest in its transactions and conducts its operations in accordance with Shariah principles to achieve the objectives of Islamic economy. The main objective of this article is to compare the level of disclosure of information by the Islamic Banking sector in Bangladesh. The findings of this article is the supervisory authorities should recognize the need to set up a regulatory framework that, while consistent with Islamic precepts, would be pragmatic and flexible enough to meet internationally-accepted prudential and supervisory requirements. Effective sensible supervision of Islamic Banks in Bangladesh is important to foster integration between Islamic and conventional banking systems.
Key words: Financial Reporting, Islamic economy, Islamic Banking Introduction
Islamic banking has achieved significant growth in Bangladesh that belongs to 20 percent share of the whole banking industry. However, investments
under Mudaraba and Musharaka are below 2 percent. Investment in socially desirable sectors like microenterprises, small projects and agricultural sectors are only getting marginal shares in total investment. Islamic banks are also facing challenges; among them major constraints include absence of separate act, paucity of money and capital market instruments, and lack of skilled manpower. The overall growth of Islamic banking in the world over the last decade in general and after the recent global financial crisis in particular has been tremendous. It has been estimated that Islamic banking has grown not only at the annual rate of 15 per cent over the past five years but has also been expanding outside its traditional borders of Muslim economies. Its current market size has been estimated at $70 billion and projected to grow around $100 billion in the early part of this century. In some countries like the Islamic Republic of Iran, Pakistan, and Sudan, all banks and financial institutions operate according to Islamic principles (Nabi et.al., 2015). In others, such as Bangladesh, Egypt, Bangladesh, Jordan, and Malaysia, Islamic banking operates along with conventional banking. Bangladesh is also not lagging behind in this respect (growth factor). Besides growth factor, there have been some dimensional developments in the field of Islamic banking in Bangladesh. Apart from first generation established Islamic banks, which have been operating under Islamic Shariah, most of the leading conventional banks have opened Islamic banking windows to deliver service according to Shariah principles.
This trend indicates that Islamic banking will keep flourishing and increase its share in the banking industry of an emerging economy, Bangladesh.
When introduced in 1983, Islamic banking in the country was conducted with very little support from the regularity authorities. Operations of Islamic banks were controlled and supervised by the Bangladesh Bank (BB) as per general guidelines framed for conventional banks. In the meantime, Islamic banking in the country achieved tremendous growth, with prospects of further expansion, mainly due to its popularity among the customers and efficient management and success of the Islamic banks and those banks which have Islamic banking functions in their selected branches. In spite of the vigorous growth, many bankers are yet to be familiar with the process by which Islamic banking can be conducted side by side the conventional system. Some people may be interested to know this dual system of banking. As fundamentals the following areas or phases are imperative to ensure successful introduction of Islamic banking into a conventional system.
It would be very relevant to quote here from Shari’ah Standards published (1425-26 H) by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a Bahrain based institution established in 1990-1991 which issues internationally recognized Shariah standard on accounting auditing and governance issues. The Bangladesh Bank, through a circular dated 09 November 2009, has introduced 'Guidelines for Islamic Banking', as a supplementary to the existing banking laws. The guidelines are to be followed by the Islamic banks and conventional commercial banks having Islamic branches, with a view to bringing greater transparency and accountability in Islamic banking. This is a major development in the banking sector in Bangladesh that will help banks to organize their Islamic banking business and comply with the rules of Shari'ah. Eleven conventional banks of Bangladesh are at present providing Islamic banking services through 24 Islamic banking branches and counters while there are 07 full-pledged Islamic banks offering products and services through 500 branches and SME centers.
What is AAOIFI?
The AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) has made an important regulatory beginning (Pomeranz; 1997).
AAOIFI seeks to support the faith of Islam by developing accounting standards for Islamic investment vehicles and by conducting related training and publicity. Further, AAOIFI also expects to strengthen the effectiveness of Sharia Committees by facilitating evaluation of emerging financing instruments and by aiding in the implementation of Islamic ethics (Pomeranz, 1997). AAOIFI, which stands for Accounting and Auditing Organization for Islamic Financial Institutions, is an Islamic accounting standard stetting Organization that has been recognized by the world's multinational institutions. Initially, the Islamic Accounting Standards and Shariah principles are the standards in the Islamic finance and they are expected to be followed by all Islamic banks.
It is very important to seek the most appropriate means through which accounting standards could be developed and implemented in order to present adequate, reliable, and relevant information to users of the financial statements of such organizations based on Islamic Sharia. Anybody can follow the existing international accounting standards those have been developed by others are helpful but do not contradict with Islamic Sharia. In the late eighties, the interest in developing financial accounting standards for Islamic banks started. Since then, several studies have been prepared
and these studies have been compiled in five volumes and deposited in the Library of the Islamic Research and Training Institute of the Islamic Development Bank (AAOIFI, 2009).
Objective of the Study
The main objective of this study is to compare the level of disclosure of information by the Islamic Banking sector in Bangladesh. Some other objectives of this research work is given below:
1. To evaluate the framework governing disclosure requirement of the banking sector in Bangladesh.
2. To measure the level of disclosure of information made by the banking sector in Bangladesh.
3. To examine the association between corporate disclosure level of the banking sector of
Bangladesh and selected corporate attributes.
4. To measure the disclosure as per the Islamic banking (accounting) standards of the Accounting
and Auditing Organization for Islamic Financial Institutions (AAOIFI).
Literature Review
Islamic Accounting is the “accounting process” which provides appropriate information to stakeholders of an entity which will enable them to ensure that the entity is continuously operating within the bounds of the Islamic Sariah and delivering on its socioeconomic objectives. Islamic accounting is also a tool, which enables Muslims to evaluate their own accountabilities to Almighty Allah (in respect of inter-human/environmental transactions).
Baydoun and Willet (2000) in their paper develops a theory about the form and the content of the financial information that should be contained in Islamic financial statements. Their theory suggests that the presence of the Islamic religion as a cultural variable affects the way certain accounting measures are interpreted and the manner in which accounting information should be disclosed. Two important criteria for disclosure in Islamic accounting are identified: (1) a form of social accountability, and (2) a rule of full disclosure. This leads to a modification of the form of the conventional Western set of financial statements, which are called Islamic corporate reports. The researchers have argued that these reports would better serve the needs of users wishing to act in accordance with the Islamic Shariah. Kamla (2009) critically explores the potential of aspects of contemporary Islamic accounting research and practice to contribute to the critical accounting project in the latter's efforts to achieve more
emancipatory and enabling forms of accounting. Kamla (2009) observed that minimal critical theorizing, as well as the narrow instrumental and mechanical emphasis of the majority of Islamic accounting research, are indications that Islamic accounting research is diverting from its primarily proclaimed social and moral roles. She severely criticized that it can be further exacerbated by the uncritical emulation and embracing of conventional accounting operations and standards by so-called Islamic ones.
With a little knowledge in accounting system and Islamic Shariah, Kamla (2009) also attempts to identify absurd ways forward for Islamic banking and accounting research to realize more emancipatory praxis.
Mashayekhi, and Mashayekh (2008) commented that although Iran has employed International Accounting Standards as the basis for developing its National Accounting Standards (based on Islamic Shariah), there are still some differences between Iranian and international standards, and there are some certain International Accounting Standards that are not applicable in Iran. They argued that a host of endemic factors, such as existing laws and rules, religious beliefs, culture, economic and political conditions, have influenced the National Accounting Standards setting processes in Iran.
Maali (2005) found that governmental regulations and commonly accepted practices have had most obvious effects on the evolution of accounting and reporting, and he argued that being exposed to a high secular environment had a large effect on the accounting practices of the Jordan Islamic Bank (JIB) and the regulatory behavior towards the bank. Maali further argued that the adoption of AAOIFI standards in 2001 in Jordan was mainly the result of pressure within JIB to achieve its objectives, most importantly, presenting the Islamic status of the bank. However, the adoption of AAOIFI standards led to an enhanced level of disclosure by Islamic banks in Jordan.
He observed that conventional accounting standards such as International Accounting Standards would be relevant to deal with these transactions as practised and perceived in JIB (Maali, 2005). It is argued by Maali that for some transactions, AAOIFI standards are better able to deal with them in the way they are practised and perceived in JIB, and the adoption of these standards would reduce the agency problem associated with investment deposits in JIB. Rifat Ahmed (2001) observed that the supervisory authorities in countries in which Islamic banks operate have been adopting different accounting treatments for investment accounts, although most of the countries in which Islamic banks operate either look directly to international accounting standards as their national standards or develop national standards based primarily on international accounting standards.
As a result, he argued that this rendered the financial statements of Islamic
banks “non-comparable”. It also implies that the calls for worldwide adherence to international accounting standards to achieve harmonization in financial reporting, regardless of cultural differences that affect the way in which business transactions are carried out, should not go unchallenged.
Rifat Ahmed (2001) focuses on the need to implement the accounting standards promulgated by the Accounting and Auditing Organization for Islamic Financial Institutions, because these standards specifically cater for the unique characteristics of the contracts that govern the operations of Islamic banks. In current work, the researchers attempt to argue the need for an alternative Islamic Accounting standard. The researcher believes that the objectives, operations and practical accounting requirements of these organizations need an alternative “accounting” framework in order for their objectives to be achieved, their operations to run smoothly and their activities accounted in a true and fair manner within the world-view in which they operate. The Islamic financial system is part of the Islamic socioeconomic system which Muslim economists and Islamists are endeavoring to develop. The development of an interest-free, ethical Islamic economic system is an important agenda of most Islamic movements and some governments such as Pakistan, Iran and Sudan (Ahmad, 1994). Other countries, such as Malaysia and Gulf countries, allow Islamic economic institutions such as Islamic banks to operate in parallel with the conventional financial system. It may be mentioned that the Islamic Financial Services Board (IFSB) was established with the signing of the Articles of Agreement of the IFSB on November 03, 2002 by the founding members— Bahrain Monetary Agency, Bank Markazi Jomhouri Islami Iran, Central Bank of Kuwait, Bank Negara Malaysia, State Bank of Pakistan, Saudi Arabian Monetary Agency, Bank of Sudan and Islamic Development Bank. Although research of Adnan (1996) attempts to argue the need for Islamic Accounting in for both business and non-business Islamic and Muslim organizations, the researcher feels that describing the accounting needs of many types of Islamic organizations in detail will be too broad for this research project. As such, the researcher has opted to concentrate on one industry i.e. the Islamic Finance industry where there has been intense development. The Islamic banking and financial institutions constituting this industry are examples of Islamic business organizations, which have established themselves in the real world. The Islamic economics has created theoretical perceptions of Islamic Economy in various Muslim and non-Muslim countries in the form of Islamic banks, Takaful (Insurance companies) and setting up other economic institutions such as Zakat collection center and relief organizations. However, it can be argued that
this success is incomplete because in many cases the changes have been cosmetic in changing the technical terms of contract rather than an underlying change in the reality (e.g. the philosophy of life). Accounting has played a part in perpetuating the same reality by privileging profits and capital in its financial statements and there is a need Islamized accounting in order to redirect the emphasis from wealth accumulation to equitable distribution and to disclose information which will enable stakeholders and the Muslim people and governmental authorities to ensure the Islamic institutions set up are achieving their Islamic objectives of achieving social solidarity and socio-economic justice among the various sections of Muslim society (Ibrahim, 2002). The establishment of Islamic banks, Insurance companies, finance companies, relief organizations call for an Islamic accounting to meet their information of the Muslim societies in which they operate (Ali, 1997; Khan, 1994) and these organizations because of their different set up and goals have an interest to make their accounts more Islamic (Ibrahim, 2002). We also argue that the trick remains in the ability of Islamic Economists to formulate an Islamic Accounting Standards that provides the required emphasis on Islamic values and principles, but still provides the required structure to integrate successfully with International Accounting Standards. In the new world of economy where globalization is one main key driver, it is very critical for the newly developed Islamic Accounting Standards to have this feature of being able to facilitate international accounting deals, as the great fear remains in the fact that with the increase of the global accounting concept, an Islamic Accounting Standards that does not provide an international frame could act as barrier against joint businesses with countries in the west. We may argue that the incomplete success we are witnessing in the banking system in Saudi Arabia could be related to this incomplete form of the Islamic Accounting Standards. It is the fact that out of ten commercial banks in only three banks are wholly owned by Saudis and AlRjhi Banking and Investment Company is the only banking institution that is following the Sharia's law and outlawed the payment of interest, where other banks are operating under mutated forms from the west and within uncertain legal frame (Vietor and Evans 2006). Western Accounting system has been exported by the developed countries (e.g. UK and USA) to the developing countries whose cultures, religion and social and business and political environment are quite different and it is questionable to adopt the western conventional accounting principles, standards and their underlying philosophy without any or negligible modification (Briston and Kedslie, 1997). The Islamic Organizations and enterprises (i.e. Islamic financial and commercial
corporations in Malaysia, Brunei, Jordan, Dubai, Egypt etc.) are for the most part using conventional accounting without much changes, although there have been developments in the establishment of Islamic Banking Standards and or Islamic Accounting Standards (Ibrahim, 2002). It may be argued that such adoption of western conventional accounting system does not coincide with the specific Islamic Objectives and hence, there is a need for a separate accounting system and/ or accounting standards based on Islamic Sariah and then incorporate the western accounting system where it does not contradict with the Islamic values. So, it can be argued that the imposed accounting system or standards by the West must be modified by the Islamic countries keeping in mind Islamic Sariah, Islamic Economy, Islamic culture and its social, political and environmental needs. IASB promulgated the standards are dealing with many issues which are expected to be of common concerns to all the countries which are the member of the organization. However, it is highly impossible for any international organization to develop accounting standards appropriate to the local needs of each and every country and an international body can prescribe accounting standards covering only certain broad areas of financial reporting (Basu, 1986). This is also true in case of Islamic Accounting standards. Local conditions of the Islamic countries like Saudi Arabia or United Arab Emirates may not be similar to those of Western countries. In that case it may be argued that an Islamic accounting standard-setting body rather than international body can formulate standards necessary to serve the needs of the Islamic countries. However, the Islamic Organization like OIC did not make any attempt to modify these accounting standards taking into consideration Islamic Sariah and Economy. It seems that the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is aware of the very need for a separate accounting system and its requirements with special reference to the Islamic countries as a whole.
Following a standard brings uniformity in an industry allowing a level playing field for interpretation of respective position of all the participants/units. As such a separate chart of Accounts (Conforming to a uniform Islamic Standard) is a must for Islamic banking in conventional banking sector in Bangladesh. Now-a-days, the need for a body of accounting standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) purposefully designed to reflect the specialization of Islamic products is a crying need for Islamic banking as new and more complex instruments are being marketed.
Theories
To explain why a company may voluntarily disclose information in the internet there are a range of theories have been employed in this present study.
Agency Theory
Why a manager disclose information for the shareholders is displayed in the following theories like (Wallace, 1988, 1994; Cooke 1989a, 1989b, 1993;
Firth, 1980; Hossain et al., 1994; Akhtaruddin, 2005; Marston & Polei, 2004 and Aljifri, 2008;). Managers believe that through the agent-owners contract, the shareholders will get their control behavior and the disclosure will be a means of attaining the optimal contact. The theory assumes that the agency cost will differ with corporate characteristics. It is argued that voluntary disclosures lower agency costs (Chow and Wong-Boren, 1987).
This disagreement would be the similar for larger company in terms of size, because if the larger company would use the advanced loan because of the tax benefit, then to satisfy the creditors, they will disclose more. The other corporate features might be explicated in the similar argument. So, the mangers will reduce the agency cost by disclosing more, to be reliable to the shareholders, and then in this regard the agency theory would be justified.
Signaling Theory
Signaling Theory which was introduced by Spence (1973) can explain the causes of disclose of more information by some firms than the others (Watts and Zimmerman, 1986). It was suggested by this theory that voluntary disclosures are one means for companies or managers to differentiate themselves from others on such dimensions as quality, performance and means & motivating factors for such discoveries including the use of large auditors and high performance (Healy and Palepu, 2001, Marston and Polei, 2004). It is assumed by signaling theory that a reaction on market arise by the disclosure of informational irregularity. Investors don’t hold sufficient information like companies. Therefore, the information asymmetry will be reduced if the company discloses much more information. The executives of the company will discriminate themselves from others. The signal of the company would be credential in terms of getting potential and forthcoming investors and creditors. For example, the profitable company, the old company and the company using big audit firms would disclose than the loss making companies, new companies and others.
Innovation diffusion Theory
The theory assumes that intra organizational structures e.g. accounting regulations and practices are largely shaped by external factors. Therefore, the organizations, operating in the similar environment are assumed to compare the demand and actual behavior including the structures, choices and designs (Meyer and Rowan, 1977). For example, the internal structures will reflect the rules and procedures that are perceived to be ‘right’ within the society (Meyer et al., 1983). There are two components of isomorphism (1) institutional isomorphism and (2) competitive isomorphism (DiMaggio and Powell, 1983). Then, these components are further classified institutional isomorphism into three categories: (a) Mimetic isomorphism;
(b) Coercive isomorphism; and (c) Normative isomorphism. Abrahamson (1991) has given force on isomorphism and imitative isomorphism where
‘the coercive’ is fundamental because a company is pressured by external officialdoms, such as the government and investors, to adopt an innovation irrespective of its benefit to the company. Lymer and Debreceny, 2003;
Marston and Polei, 2004 argued with the above theories explain voluntary information disclosure because these researchers assumed that in countries the financial reporting practice are considerable importance with developed securities markets. However, this study seeks to paint that “in emerging economies the IFRS practices are very important as well. To develop in the hypotheses these theories were used, which are empirically tested at a later stage and in this context; 09 variables are employed to clarify the voluntary discovery of financial reporting of financial organizations of an emerging economy in, Bangladesh. Some research works have been done on financial discloser of financial reporting of Islamic financial institutions but this is true for abroad. No comprehensive study was done on this area in Bangladesh. So there has a research gap in this field especially in Bangladesh. For this reason, this field was selected for this study.
Research Methodology
Sample Companies and Selection of the Sample Size
As previously mentioned, there are seven (7) Islamic Commercial Banks which are currently working in Bangladesh were Purposively selected for this study. The sample of this study was consist of all the seven banks whose annual reports for 2013 are available from the Dhaka Stock Exchange and Chittagong Stock Exchange. These Islamic banks are ICB Islami Bank, Islami Bank Bangladesh Limited, Shahjalal Islami Bank Limited, Al-Arafa Islami Bank Limited, First Security Islami Bank Limited, Export Import Islami Bank Limited and Social Islami Bank Limited. This sub-section highlights the characteristics of the 07 banks, which include firm-level
characteristics. This study was made basically on secondary sources of data.
The annual report of the selected banks was collected from their own website. To collect some unavailable data in web-siteresearchers also visit the head office of some sampled banks like Al-Arafah Islami Bank Limited, Islami bank Bangladesh Limited and First Security Islami Bank Limited.
Though Sonali Bank Limited is not our sampled bank but the researcher tried to collect data from this bank web-site because they also offer islami- banking in some branches. But no mentionable data was received from this bank web-site to use for this research. For analyzing data suitable statistical tools Statistical Package for Social Science (SPSS) were used.
Disclosure Index for the Islamic Banks and Institutions based on AAOIFI Standards
In the present study it has been constructed a Comprehensive Disclosure Index (CDI) for the sample Islamic Banking and Institutions in Bangladesh which were included in the items of information based on the selected Islamic Accounting Standards. In order to validity be enhanced, items were developed sensibly from a number of similar type studies as well as guidelines those have considered similar type of selected Islamic Accounting Standards.
Scoring in the Disclosure Index
There are various approaches available to develop a scoring scheme to determine the disclosure level of corporate annual reports from the works of other researchers. There are researchers who adopted a “dichotomous procedure” in which an item scores one if disclosed and zero if not disclosed.
The approach used by many other researchers who went for a weighted disclosure index to be employed. In some cases, the weights were predetermined by the researchers subjectively. According to the unweighted disclosure index disclosure of accounting standards of individual items has been treated as a dichotomous variable. Here, the simply consideration is whether or not a company discloses an item of accounting standards information in its corporate annual report. If a company discloses an item of accounting standards information in its annual report, it has been awarded
`1' and if not it has been awarded `0'. The disclosure model for the un- weighted Islamic Banking & financial institutions' disclosure of the information was thus measured the full disclosure (FD) score for a
company as additive as follows: TD= di
i n
1 Where,
d = 1, if the item di is disclosed d = 0, if the item di is not disclosed n = number of observations
In this study ‘Disclosure Index Approach’ was used, and considered unweighted Disclosure or Dichotomous model. An “unweighted index” of disclosure of items is the ratio of the value of the number of items, a company discloses is divided by the total value that it could disclose. Under an unweighted disclosure index of the items those should be disclosed by the Islamic banks & Institutions, all items of information in the index are equally important to the average user. The unique advantage of using an unweighted index approach permits an analysis of the independent perception of a particular user group (Hossain, 1999). If different information users as per the disclosure index approach then has been asked to weigh the significance of different items of information as per the items of information in the disclosure index, they may attach different weights to the similar items of information as per accounting standards. In this research proposal, unweighted index has been considered to find out the relationship between the extent of disclosure made by the Banks and Financial Institutions in Bangladesh and various corporate attributes. The sample Islamic banks & institutions were then ranked based on their unweighted disclosure Index (UWDI).
Importance of Discounting Techniques of Islamic Banking
interest/Riba is forbidden by Islam forbids but it permits trade that inevitably accepts risk in the upcoming periods. On the other hand, Islamic economic activities contribute to bringing about "Economic and non- economic" returns for the entrepreneur as well as to society. Therefore, any investment under Islamic principles should seek present welfare derived through employment, higher present earnings for the community and a reasonable return to the entrepreneur himself. The point here to be examined is what could be the relationship between Islamic return and risk (both economic and non-economic). In an Islamic economy the bank and its customers jointly share the value of risk. The sharing of net income and net
losses are undertaken by both the clients and the Islamic bank. Under the Islamic outline a project with a low predictable return may be recognized if the non-economic/social mechanisms of the project are significant. The profit produced or the loss incurred are shared by the partners on a reciprocally agreed upon proportion under the different Islamic modes of Financing. Unlike the conventional means of project financing, where the bank-creditor is guaranteed of a scheduled return in the form of interest payment, the Islamic Sariah based banks share with their customers both the return and the risk that a project entails. Therefore, when the risks and returns are mutually shared by the partners, it is more essential that the project be estimated as persuasively as probable as the interest of both the client and the bank are at stake.
Analysis and Findings
The following data was collected and after analyzing those data the following findings were developed:
Table 02: List of Islamic Banks in Bangladesh and The Branches of Them in 2013
SN Name of Islami Bank Year of Incorpora
tion
Total Number
of Branche
s
Listin g Status
Year of Listing
01 ICB Islami Bank 1987 17 Listed 1990
02 Islami Bank Bangladesh Limited
1983 331 Listed 1985
03 Shahajalal Islami Bank Limited
2001 50 Listed 2007
04 First Security Islami Bank Limited
1999 117 Listed 2008
05 EXIM Bank Limited 1999 131 Listed 2004
06 Al-Arafah islami Bank Limited
1995 140 Listed 1998
07 Social Islami Bank Limited
1995 94 Listed 2000
(Website of related bank,2013)
Remarkable Services Provided by Islamic Sariah Based Banks in Bangladesh
Musharaka: Musharaka is a partnership in which each equity contributor has a right to share in the profits of the project. Mudaraba: Under this
Islamic mode of financing, the bank provides all of the capital for the project while the client only puts contributes his efforts and skills. Murabaha:
Murabaha is a system of purchase and sales of goods by the bank. Bai- Muajjal: Bai-Muajjal means credit sale of goods by the bank to the customer.
Bai-Salam: Bai-Salam means forward purchase of the potential product.
Ijarah: Ijarah is a rental agreement between the bank and the customer.
Hire Purchase: The hire purchase method of financing enables a bank to finance the purchase of movable and immovable assets. There are other investment techniques in Islamic banking such as Direct Investment by the bank, Investment Auctioning, and Qard Hasan. The following Card services are also provided by the Islami Banks in Bangladesh.: Khidma Credit Card, Hajj Card, Salary Card, Prepaid Card, Remittance Card.
Quantitative Disclosures
In line with the final guidelines issued by Bangladesh Bank, the Bank has adopted the Basic Indicator Approach for computing capital for operation risk. As per the guidelines, the capital for operational risk is equal to 15% of average positive annual Gross Income of the previous three years, as defined by the Bangladesh Bank.
Table 03: Quantitative Discloser
Year Gross Income (GI) Average (GI) Capital charge @ 15% of Average Gross Income
2013 424.80
353.14 52.97
2012 369.01
2011 265.61
Total 1059.42
Table 04: Compliance with disclosure- Mudaraba Financing
Year Mean Median Standard
Deviation Minimum Maximum
2010 68.24 71.43 17.85 33.33 100
2011 77.63 77.78 12.47 50 91.67
2012 76.99 77.78 14.00 41.67 91.67
2013 76.99 77.78 10.73 58.33 91.67
Table 05: Compliance of Disclosure – Musharaka Financing
Year Mean Median Standard
Deviation Minimum Maximum
2010 73.53 72.73 11.09 58.33 90.91
2011 77.53 80.91 9.28 54.55 90.00
2012 76.23 80.91 12.95 36.36 90.00
2013 79.48 81.82 6.77 63.64 90.00
Table 06: Compliance with Discloser of Islamic Sariah Bank in Bangladesh
Year Murabaha Mudaraba Musharaka Overall
2010 81.11 67.95 76.50 75.49
2011 80.14 72.31 79.67 80.06
2012 80.14 71.39 78.02 78.94
2013 82.22 74.16 82.15 81.58
Table 07: Categories of Required Items for Discloser Under Bangladesh Bank Guideline
SL Categories of Discloser Required
Item 01 Discloser of information in income statement 13 02 Discloser of information in balance sheet 18
03 Statement of change in equity 01
04 Discloser of information in cash flow statement 12 05 Information in the notes to income statement 15 06 Information in the notes to balance sheet 30
07 Highlights of prescribed items 22
08 Liquidity statement 01
09 Off balance sheet items 05
10 General information 11
(Source Bangladesh Bank 2009)
Table 08: Mean Difference in the Trend of Compliance in the Period of 2010-2013
Test Murabaha Mudarab
a Musharaka Overall
Z -1.388b -2.318b -1.434b -2.777b
Asymp. Sig. (Two –
Tailed) 0.165 0.020 0.151 0.005
Note: Wilcoxon signed rank test
The purpose of disclosures in pursuance of the Market Discipline as required by the Revised Capital adequacy framework under Basel (a set of bank regulations) III is to complement the minimum capital requirements and the supervisory review process. The aim of such disclosure is to establish more transparent and more disciplined financial market so that stakeholders can assess the position of the Bank regarding holding of assets
and to identify the risks relating to the assets and capital adequacy to meet plausible loss of assets.
Conclusion
The Basle Committee for Banking Supervision are needed to develop a framework, standards and practices and these plays a valuable role on discloser of financial reporting system of Islamic financial institutions. In countries where both systems are operating (Islamic financial accounting system and general accounting system, the supervisory authorities are recognized to fixup the need a regulatory framework that, while consistent with Islamic precepts are pragmatic and flexible enough to meet internationally-accepted prudential and supervisory requirements. Till now effective prudential supervision on Islamic banks are not present in Bangladesh which is important to foster integration between Islamic and conventional banking systems. This study has shown that Islamic Accounting is different from the traditional western accounting system in many respects. Although there are many Islamic counties in the world, they are following mainly the western accounting system. The main goal of International Accounting Standards is to have harmonized financial accounting and reporting system all over the world. In recent years, the hegemony of western accounting concepts in the developed or underdeveloped emerging economies has been recognized in the literature.
A committee has been set up in the Institute of Chartered Accountants of Bangladesh (ICAB) for development/review and adoption of International Accounting Standards (IASs) and or International Financial Reporting Standards (IFRS), but till now no such bodies are working for Islamic modes of financing. The Committee of the ICAB is not in a position to review the accounting standards set by Accounting and Auditing Organization for Islamic Financial Institutions(AAOIFI), Bahrain with a view to adapt them to Bangladeshi environment. Garnett has been working with the AAOIFI to try to work out the differences between IFRS and the Islamic standards. It is proved that the Islamic banks of Bangladesh have the tendency to comply with the rules set by Bangladesh Bank. Nevertheless, the Bangladesh Bank’s guidelines do not address all the aspects of Islamic Shariah.
Therefore, to ensure full compliance with all disclosure requirements, it is important to ensure close supervision and monitoring of the banks.
Alongside, banks should also take care about preparation of their FSs to ensure full compliance.
References/Bibliography
1. AAOIFI (1996) “Accounting and Auditing Standards for Islamic Financial Institutions.” Manama, Bahrain: Accounting and Auditing Organization for Islamic Financial Institutions. (Also available at http://www.aaoifi.com).
2. Abrahamson, E. (1991) “Managerial Fads and Fashions: The Diffusion and Rejection of Innovations.” Academy of Management Review Vol.
16, No. 3, 586-612. Columbia University.
3. Adnan, M. A. (1996) “An investigation of accounting concepts and practices in Islamic banks: The cases of Bank Islam Malaysia Berhad and Bank Muamalat Indonesia.” Ph.D. dissertation, University of Wollongong, Australia.
4. Ahmad, K., Rahman, K. and Valie, Z. A. (1994) “Inaugural Address” in Elimination of Riba from the Economy.” Islamabad, Pakistan: Institute of Policy Studies.
5. Basu, A. K. (1986) “Accounting Standards and Indian Accounting”, Business Studies, Vol. XII, Nos. 1 & 2, pp. 42-54.
6. Baydoun, N. and Willet, R. (2000) “The Islamic Corporate Report”, Abacus, Vol. 36, No. 1, 2000.
7. Botosan, C. A. (1997) "Disclosure level and the cost of equity capital", The Accounting Review, Vol. 72 No. 3, pp. 323-49.
8. Chapra, M. U. and Ahmed, H. (2002) “Corporate Governance in Islamic Financial Institutions.” Islamic Research and Training Institute, Islamic Development Bank, Jeddah.
9. Coles, J. L., Daniel, N. D. and Naveen, L. (2008) "Boards: does one size fit all?", Journal of Financial Economics, Vol. 87 No. 2, pp. 329-56.
10. Garnett, R. (2009) “IFRS to Converge with Islamic Accounting Standards.” http://www.webcpa.com/news/IFRS-Converge-Islamic- Accounting-Standards-50141-1.html.
11. Haniffa, R. and Hudaib, M. (2007) "Exploring the ethical identity of Islamic banks via communication in annual reports." Journal of Business Ethics, Vol. 76, pp. 97-116.
12. Hermalin, B. E. and Weisbach, M. S. (1998) "The determinants of board composition", Rand Journal of Economics, Vol. 19 No. 4, pp.
589-606.
13. Hossain, M. A., Islam, K. S. and Andrew, J. (2006) “Corporate Social and Environmental Disclosure in Developing Countries:
Evidence from Bangladesh.” The Asian Pacific Conference on International Accounting Issues, Hawaii, citeseerx.ist.psu.edu.
14. Hossain, M. A. (1999) “Disclosure of Information in Corporate Annual Reports of Listed Non-Financial Companies in Developing Countries: A comparative Study of India, Pakistan and Bangladesh.”
Unpublished Ph.D. Thesis, School of Accounting and Finance, The Manchester University.
15. Hossain, M. M. and Khatun, M. (2014) “Disclosure Compliance of Islamic Banks in Bangladesh: Local and International Regulatory Perspective.” Journal of Islamic Economics, Banking and Finance, Vol.
10,
16. Ibrahim, S. H. B. H. (2000) “The Need for Islamic Accounting:
Perceptions of its Objectives and Characteristics of Islamic Accounting:
Perceptions of Malaysian Muslim Accountants and Accounting Academics.”
Unpublished PhD thesis, University of Dundee: UK , pdfs.semanticscholar.org.
17. Ibrahim, S. H. B. H. (2002) “The Need for Fundamental Research in Islamic Accounting”. Unpublished working paper, Islamic University of Malaysia. pdfs.semanticscholar.org.
18. Imhoff, E. A. J. (2003) "Accounting quality, auditing, and corporate governance." Accounting Horizons, Vol. 17 No. s-1, pp. 117-28.
19. Jensen, M. and Meckling, W. (1976) "Theory of the firm:
managerial behavior, agency costs and ownership structure." Journal of Financial Economics, Vol. 3, pp. 305-60.
20. Kamla, R. (2009). “Critical insights into contemporary Islamic accounting”. Critical Perspectives on Accounting, 20(8), 921-932.
21. Klein, A. (1998), "Firm performance and board committee structure." Journal of Law and Economics, Vol. 41 No. 1, pp. 275-303.
22. Maali, M. B. (2005) “Financial Accounting and Reporting in Islamic Banks: The case of Jordan.” Ph.D. dissertation, University of Southampton (United Kingdom), England, ethos.bl.uk.
23. Mashayekhi, B. and Mashayekh, S. (2008) “Development of accounting in Iran.” The International Journal of Accounting, 43(1), 66.
24. Meyer, J. W. and Rowan, B. (1977) “Institutionalized Organizations: Formal Structure as Myth and Ceremony.” American Journal of Sociology, Vol. 83, No. 2.
25. Nienhaus, V. (2007) "Governance of Islamic banks", in Kabir- Hassan, M. and Lewis, M.K. (Eds), Handbook of Islamic Banking, Edward Elgar, Cheltenham, pp. 128-43.
26. Nabi, M. G., Islam, M. A. and Akter, A. (2015) “Islamic Banking in Bangladesh: Current Status, Challenges and Policy Options.”
www.researchgate.net.
27. Pearce, J. A. and Zahra, S. A. (1992) "Board composition from a strategic contingency perspective", Journal of Management Studies, Vol. 29 No. 4, pp. 411-38.
28. Pomeranz, F. (1997) “The Accounting and Auditing Organization for Islamic Financial Institutions: An important regulatory debut.”
Journal of International Accounting, Auditing and Taxation, Volume 6, Issue 1, 1997, Pages 123-130.
29. Karim, R. A. A. (2001). International Accounting Harmonization, Banking Regulation, and Islamic Banks. The International Journal of Accounting, 36(2), 169-193.
30. Safieddine, A. (2009) "Islamic financial institutions and corporate governance: new insights for agency theory." Corporate Governance: An International Review, Vol. 17 No. 2, pp. 142-58.
31. Veitor, R. and Evans, R. (2006) " Saudi Arabia: Getting the House in order" Harvard Business Review, Harvard Publishing Corporation, MA, Boston.
32. www.bb.org.bd
33. www.eximbankbd.com 34. www.islamibankbd.com 35. www.al-arafahbank.com 36. www.unionbank.com.bd 37. www.siblbd.com
38. www.al-arafahbank.com 39. www.icbislamic-bd.com
